Garnaut raises the bar

The television advertising campaign probably won’t make much difference, but
Ross Garnaut
’s final report on Australia’s response to climate change just might.

When people think their living standards are at stake, they demand real information, not slogans.

Few members of the public will ever read the Garnaut report but if the media and the government do their jobs, enough of the information in it should filter down.

Like the actors in the advertising campaign, Garnaut believes that Australia should be among the early movers in taking action to reduce its greenhouse emissions. But, as a prominent economist and former diplomat, Garnaut has expertise both in navigating the route to global greenhouse action and in minimising the economic cost of emissions reduction.

That makes the key conclusions of the report worth listening to.

The case for global action, Garnaut concludes, is beyond reasonable doubt. The world is on its way towards substantially cutting emissions growth, and “Australia’s strong national interest in effective mitigation is served by helping to make the emerging arrangements work".

The emissions reduction policy proposed by the government would be one of the biggest reforms of the economy to date, and action to reduce emissions should be designed to impose as little economic cost as possible.

That requires a market-based policy that allows individual businesses and households to find the most cost-effective ways to adjust, as proposed by the Gillard government, and both the Rudd and Howard governments before it. But, says Garnaut, it also requires that the Gillard government refrain from squandering the revenue generated from the sale of emissions permits on unnecessary assistance for industry.

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That last piece of advice will not necessarily be welcomed by a prime minister whose first instinct is to buy political peace almost regardless of the cost. But as Garnaut reminds us, half the cost to the economy of cutting emissions can be offset if the government uses revenue to cut taxes that reduce disincentives to work.

The government, Garnaut says, should compensate, but not overcompensate, low- and middle-income households.

Its next priorities in redistributing the revenue from the emissions trading scheme should be to cut effective marginal tax rates for low-income earners, assist emissions-intensive, trade-exposed industries, and encourage the development of low-emission technologies.

Of course, the public should note that there could be an even bigger offset to the cost of emissions reduction if the federal and state governments accelerated the reforms needed to boost productivity growth more generally. The desire to cut greenhouse emissions strengthens, rather than weakens, the argument for wider economic reform.

No one, including Garnaut, expects the public to take his judgments and recommendations as gospel. But the report should set the bar for the public debate. Politicians who respond to Garnaut’s careful argument with cheap debating points should be taken with a grain of salt. And so should businesses seeking special preferment.

There will be no shortage of either.

Garnaut is right when he says the greenhouse challenge has encouraged the revival of the old Australian political culture in which economic policy too often was tailored to meet the demands of special interests.

That culture, which produced high import barriers and anti-competitive regulation of parts of agriculture and the service industries, was partly responsible for Australia’s slide down the ladder of developed-economy living standards through the second half of the 20th century.

Now, as the stakes are raised by the prospect of an emissions trading scheme, industry is returning to its old rent-seeking ways.

There is a case for structuring the ETS to both exclude exports and shield industry against untaxed emissions-intensive imports, at least until the rest of the world is taking action to curb emissions.

That case is rejected by Garnaut and, presumably, the government.

The risk now, as industries queue up for special treatment from the Gillard government, is that the assistance will be handed out selectively and often for reasons that have nothing to do with the global warming policy.

If that is allowed to happen, resources in the economy will again be allocated on the basis of political pressure.

It’s a slippery path, with each decision to give assistance strengthening the political case for the next.